This company had managed to increase its dividend distributions every year between 2009 and 2020. And by a wide margin too. In 2009, Transurban paid out 22 cents per share in distributions. By 2019, that had grown to 59 cents per share, an annual compounded growth rate of 10.37%.
This yield seemed very secure too. Transurban operates toll roads, a highly stable and predictable earnings base. Well, that’s what we all thought until COVID-19 came along.
It turns out that a global pandemic was one of the few events that could spark a situation where everyone effectively stopped driving. Well, not everyone. But in April last year, Transurban reported that traffic volumes had dropped by close to 50% on some of its roads.
Traffic volumes slowly recovered over 2020, but that wasn’t enough to prevent some serious damage to Transurban’s dividend distribution abilities. In 2020, the company managed to pay out just 47 cents in distribution, breaking its 10-year streak of annual increases.
Things have still not recovered today either. Last August, Transurban paid out a distribution of 16 cents per share. Back in February this year, Transurban’s distribution came in at 15 cents a share.
Have we found the bottom for Transurban’s dividend?
In its half-year earnings report that Transurban delivered in February, the company did not expand too much on its future distribution plans. It only told us that the 15 cents per share distribution was “114% covered by 1H21 free cash [flow]”. It went on to say that “FY21 distribution [is] expected to be in line with Free Cash, excluding Capital Releases”.
So how do these dividend distributions translate into yield for Transurban shares? Well, on the current (at the time of writing) Transurban share price of $13.88, Transurban’s last two distribution payments of 16 cents and 15 cents per unit equate to a trailing yield of 2.23% for Transurban shares.
What does the future hold?
A trailing yield of 2.23% is not what investors were used to before COVID. But this is a Brave New World Transurban is operating in today. Remember, the company told us in February that its traffic volumes between 1 July and 31 December 2020 were down 17.8% against the same period in 2019.
Transurban funds its dividends through free cash flow. As such, we would probably need to see these declines reversing and traffic volumes to get close to, or back to, where they were pre-COVID before the company can increase its dividends back to its old levels.